The Canon S110. It's very small (fits easily in a shirt pocket with room to spare), takes pretty good pictures (color is good, focus is pretty good, flash is ok), the zoom is not so great (it's only 2x and seems to jump rather than zoom in/out smoothly), it has decent resolution (2.1MP is good enough for 4x6's as far as I'm concerned and 5x7's still look good), it has a lithium-ion battery that lasts quite a while (especially if you aren't using the flash and you turn off the display), and takes CompactFlash (my favorite of the various memory type). I like the software it comes with too. At ~$375 online, it's well under $500.
The single biggest selling point for the S110 is the small size. It's really small and as such I tend to take it all over the place. Even in it's case, I can fit it in a jacket pocket and not notice it at all. If the size of the camera doesn't matter then there are better cameras out there for the price, but I know that I use mine a lot more than my friend uses his Canon G1 simply because I don't even notice that I have it when we go out.
Eventually I'll upgrade my S110 to something like an S40 (a friend has an S40 and I'm pretty impressed) when they drop below $500 , but for now, I'm very happy with the size and quality of the S110.
My opinion is based on using several other (more expensive, >$500) cameras:
My father has a Sony DSC-P5 (~$600). I have taken about 100 photos with it. The camera is quite a bit bigger than my S110, but it seems to take slightly better pictures: the colors seem more vibrant than the S110, while the focus doesn't seem quite as good. The flash appears to be brighter to me. His has a 3.3MP resolution but to be honest, I could barely tell the difference when I printed out 4x6's with it (HP P1000) and compared it to my 2.1MP. The battery seems better than mine, but it takes Sony's memory stick which seems to be quite a bit more expensive (like 300%) than my CF cards and requires more costly adapters to use.
A friend has a G1 which I am much more impressed with. The pictures are beautiful, the flash is great, the colors and focus are great. My only problem with the G1 was the price, and I like the small size of the S110.
And another friend has an S40 which is probably going to be my next camera. I have taken about 30 pictures with it and was completely impressed with everything about it but the price.